Nov 28 Trump Visits Japan: Trade Deficits and Devaluation of the Yen

On November 6, US President Donald Trump began his twelve-day Asian tour with a visit to Japan to discuss the rising North Korean threat and the issue of imbalance between the United States and powerful Asian economies.

President Trump, who campaigned heavily on the idea of “America First” protective trade policies, has historically been critical of trade with Asian countries such as China, South Korea, and Japan. He accused many of these countries of currency manipulation and theft of American manufacturing jobs.

In his speech to Japanese business leaders in Tokyo, the President claimed that Japan has “been winning on trade” in recent years. The President said his country had "suffered massive trade deficits at the hands of Japan for many, many years." He said the United States wanted “free and reciprocal trade, but right now our trade with Japan is not free and it's not reciprocal and [he knows] it will be and we've started the process." President Trump offered for them to try building their cars in the United States instead of shipping them over, adding “that's not too much to ask… is that rude to ask?"

The President encouraged Japanese car manufacturers to build factories and plants in the United States. He also expressed his desire for increased hiring and investment in the United States by Japanese firms.

According to the US Treasury Department, Japan had a trade surplus of $69 billion with the United States last year. According to the World Bank, the United States is Japan’s largest trading partner. The renegotiation of potential American-Japanese trade relations, and the greater potential for disruption, could be disastrous. However, it begs the question about how the value of the Japanese Yen dictated trading patterns and practices between the two countries.

Many analysts have attributed the recurring trade deficits to rampant currency devaluation. Currency devaluation is often used by countries to strengthen domestic industry by creating a model of production that focuses on the export of goods to be sold abroad. Theoretically, an artificially devalued currency lowers the costs of production and prices of products, making these goods attractive to foreign consumers. The move further bolsters existing domestic products as foreign goods become comparably expensive to those made in their home country. Furthermore, countries have incentives to devalue their currencies in order to boost employment in export-focused industries.

The low value of the Japanese Yen relative to the robust United States dollar, and the subsequent cheaper prices, has attracted US consumers to purchase Japanese cars, agricultural products, electronics, and pharmaceutical drugs. The rise of trade surpluses did not start for Japan until the 1980s, when investors shirked the Yen as a means for international currency investments. The lack of Japanese investment behind the Yen led to its rapid weakening against the U.S. dollar. Thus began the Japanese Asset Price Bubble in the late 1980s, which led to aggressive economic expansion of the Japanese economy as an export power. However, the Yen has been characterized by mercurial swings of appreciation and depreciation since 1995. These abrupt fluctuations have encouraged the Japanese government and the Bank of Japan to be protective of its currency in order to preserve its export-based economy.

As President Trump met with Japanese Prime Minister Shinzo Abe, and eventually the leaders of other Asian economic titans, he must have been forced to address the underlying cause of the trade imbalances, currency devaluation, a topic sure to leave many Asian leaders uncomfortable.